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Tax treatment of certain currency gains

On March 12, 2014, the Conseil d'Etat ruled on the treatment of a currency gain derived from the sale, by a French tax resident, of real estate located in Japan.

The FTA took the position that while the capital gain on the sale of the Japanese real estate should be, indeed, taxable in Japan as per the Japan/France tax treaty, the currency gain element should be treated separately and be taxable in France.

The Conseil d'Etat ruled that, in the absence of any provision of the treaty to the contrary, there is no basis to treat the currency gain (which is directly related to the sale of the real estate) differently from the rest of the capital gain, i.e., the latter should be exempt from any taxation in France (even if Japan does not tax such currency gain).

The situation would have been different if the currency were not directly attached to the sale. Indeed, the Conseil d'Etat has decided, in the past, that if the currency gain is related to a foreign currency swap or to a foreign currency borrowing, both related to the hedging and/or financing of the non-French real estate, then it should be taxable in France. The basis of this decision is that it should be detached from the capital gain and/or the income generated by such real estate (assuming that the ownership and management of the real estate do not amount to a permanent establishment in the foreign jurisdiction, in which case the swap and/or financing would be allocated to the foreign permanent establishment).